Potential Paths For Soon-To-Retire Financial Advisors

Tenured advisors have invested a lifetime in building a business with real value, yet many don’t have a succession plan. Why the delay? And what are their options?

Succession planning has become one of the hottest topics in the industry and a leading driver of advisor movement. In their recent study, The Impending Succession Cliff, Cerulli reported that more than one-third of advisors are expected to retire within 10 years, setting up the transition of nearly 40% of assets. Yet some 26% of advisors still do not have a succession plan in place.

While the lack of a plan is often attributed to short-sightedness by advisors, the real issue that has unfolded in the background reveals a scarcity of next gen talent available to succeed those set to retire.

Advisors have invested a lifetime building a business with real value. Still, that value can only be realized if they have a next gen in place who can ensure continuity—that is, not only sustaining but also growing the business into the future.

The dilemma for many top advisors who do not have a next gen in place is to determine if an appropriate successor exists within their current firm and local market. When they cannot find the right match, soon-to-retire advisors often opt to explore options elsewhere as a way of multiplying the potential number of suitors for their business.

Yet even those advisors who have a next gen wrestle with the notion of how they will monetize their life’s work at the end of the day. As a result, most wealth management firms have developed programs – such as Merrill’s CTP (Client Transition Program), Morgan Stanley’s FAP (Former Advisor Program), and UBS’s ALFA (Aspiring Legacy Financial Advisor) Program – that allow senior advisors to retire in place and the next gen to take-on ownership of the business over time.

Surely, for those advisors who are certain that their firm will be the right legacy for their business, their clients, and next gen, these retire-in-place programs are a gift. They offer a path of least resistance, rewarding senior advisors for their loyalty and next gen inheritors with a way to build their business. But there are considerations that many advisors are not aware of as they contemplate the next steps in their careers.

Senior advisors need to be crystal clear about the ties that bind them by fully understanding the agreements they are signing – specifically any and all post-employment restrictions – because ultimately, they are signing over their business lives to the firm.

For the next gen, as attractive as the opportunity may be to “inherit” a book, these programs serve as powerful retention vehicles, binding the inheritors to their firms for a period of five years or more. Should these inheritors have their sights set on changing firms or models prior to satisfying the terms of the agreement, they may find a transition to be more difficult or costly.

The message here – whether you are the soon-to-retire advisor or next gen inheritor – is that it is imperative to be thoughtful and deliberate before you sign a succession agreement that will bind you and your business to your firm indefinitely. Be 100% certain you can live with any and all changes that may come down the pike during the life of the agreement. Know your options: Because signing away optionality means losing control of your destiny—and your destiny should be only yours to control.

That said, for those who choose not to sign on, there are other succession pathways to consider:

1. Go independent.

This is a path that often appeals to next gen talent who are attracted to the notion of becoming entrepreneurs without ties to a corporate entity.

If a senior advisor is fortunate enough to have a next gen partner willing to do the heavy lift that a move to independence requires, crafting a custom succession plan that identifies exactly when and how the senior advisor might retire provides the highest level of control.

Plus, for those with their sights set on the longer term, independence is a way of unlocking the true value of the business.

2. Move once, monetize twice.

Senior advisors who are feeling that their firm may not be the right partner for the long-term yet still want to stay in the game for at least the next five to 10 years may opt to “move once and monetize twice.”

That is, monetizing the business in the short-term by moving to another traditional firm and taking advantage of a significant recruiting deal—and monetizing again when they retire via the new firm’s sunset program.

This can be a lucrative and effective way of continuing to leverage the all-under-one-roof resources of a major firm and not lose the opportunity to take meaningful chips off the table.

3. Customize your own succession agreement.

There is yet one more path that we are seeing with greater frequency. That is, one in which senior advisors identify a family member or other trusted next gen to succeed them.

If collectively they decide that their firm’s retire-in-place program is too restrictive, they can engage legal counsel to craft a custom agreement outlining the parameters around the partnership, including the senior advisor’s retirement process and the next gen’s purchase of the business.

This makes the senior advisor’s retirement less “prescribed” and more of a personal agreement between the parties involved by taking their firm out of the equation.

While many tenured advisors have put off thinking about their future, the good news is that it’s not too late. In an evolved landscape, there are several options to consider—each offering ways to ensure continuity of the business and a pathway to monetization.